Practitioners are often in the position of cleaning up beginning balances. An understanding of how QuickBooks® deals with data is a good prelude to the listing of action steps for cleaning up the accounts.
For some users it may seem counter-intuitive, but it is the nature of QuickBooks to be perpetually posting and perpetually open.
Perpetually Posting. By this I mean that users update the General Ledger each time they enter a new posting transaction (e.g. Invoice, Bill, or Check), edit an amount on a previously recorded transaction, or delete a transaction.
Perpetually Open. By this I mean that individual transactions are never removed from the database, e.g., through a year-end close. (Note: QuickBooks has a file condensing feature that removes transaction-level detail from the database. However, this feature is designed to reduce the size of the data file, not to perform a year-end close.)
This perpetually posting and perpetually open behavior in QuickBooks:
Allows users to have real time, down-to-the-minute financial information with which to manage their businesses. Allows users to create very detailed and highly customized reports.
Allows users to display reports using either cash or accrual basis. (Note: This feature affects open [unpaid) transactions that post to Accounts Payable or Accounts Receivable, with an offset to one or more Income
Statement accounts. For example, an open Invoice that debits Accounts Receivable and credits Sales would not show on cash basis reports. QuickBooks does not include other accrual postings [e.g., Prepaid Expenses or Accrued Payroll) when converting from the accrual to the cash basis.] Allows users to create, edit, void, and delete transactions dated in previous reporting periods.
Because QuickBooks users can create, edit, void and delete transactions dated in previous reporting periods, you will need begin your year-end work by making sure the beginning balances for the period agree to your records (e.g., last month's compilation or last year's tax return/presented financial statements).
You can perform the following steps to prevent changes to previous reporting periods and, as necessary, to reverse changes your clients make to previous reporting periods.
Preventing Changes to Previous Reporting Periods Step 1: Set a Closing Date
In Accounting Company Preferences you can set a Closing Date. The Closing Date prevents users from changing, deleting or entering transactions dated on or before the Closing Date. The Closing Date could be accurately named the "Locking Date" since this describes the effect of this date on the data file. Note: Only the Administrator of the file, working in single user mode, can set the Closing Date.
Step 2: Set a Closing Date Password
The Administrator of the file can always bypass the Closing Date. Non-Administrative users can also bypass the Closing Date if their user permissions allow them to do so. If the Administrator (or other users with the rights to bypass the Closing Date) attempt edit, delete or enter a transaction dated on or before the Closing Date, QuickBooks will display the following message.
To further protect closed periods you can set a Closing Date password. If you do, all users (including the Administrator) have to enter a password before making changes to closed periods. You set this password by
When a user attempts to enter, edit, or delete a transaction in a closed period, QuickBooks now displays the following message, prompting the user to enter a Closing Date password.
Tip: Since the Administrator of the file can always edit or remove the Closing Date password, hiding the password from the client is not advised. Instead, you can make the password itself a message that they should not make changes to the previous reporting period. For example, you could use "Don't do this" or "Call Accountant" as your Closing Date passwords.
Step 3: Edit User Permissions to Prevent Uses from Bypassing the Closing Date
Even if the user knows the Closing Date password, (s)he will not be able to make the change without logging off and then logging back in as the Administrator of the file (assuming they know the Administrator password).
Step 4: Create a User Profile (i.e., Alternate Login) for File Administrator
It is best to discourage your clients from using QuickBooks as the Administrator of the file. Even in a single-user environment there should be at least three QuickBooks users: the Admin, the Owner and the Accounting
Professional/Consultant. (Note: You do not have to purchase multiple licenses of QuickBooks to set up additional user profiles.)
When you set up the user profile for the Owner (and all other user profiles), prevent the user from making changes to closed periods as described in Step 3 above. Though the owner could always log on as the Administrator and then make the change, the extra steps involved will reduce the likelihood of changes to the previous period.
Locating and Reversing Changes Made to Previous Reporting Periods The Audit Trial
The Audit Trail lists all transactions entered into the file and the complete history of changes, deletions and/or voids for those transactions. If a client makes a change to a prior period transaction, the Audit Trail will record that change. However, consider the following when using the Audit Trail to troubleshoot the Beginning Balance column:
If the client has been using QuickBooks for 6 months or more, the Audit Trial report will contain huge amounts of data. Normally you can use filters to streamline the amount of data and to locate individual transactions. However, the data on the Audit Trail report includes deleted transactions. Since QuickBooks filters for existing transactions only, the deleted transactions cause the filtering not to function as well as other reports. Though the Audit Trail is a powerful report, especially when searching for fraudulent behavior, using the Audit Trail to troubleshoot Beginning
Balances creates the classic "needle in a haystack" scenario. Clients will often turn the Audit Trail off for extended periods of time – or never turn the Audit Trail on. The report does not track transaction activity while turned off.
The Closing Date Exception Report
To correct the 12/31/2004 balances you can:
Edit the Bill to restore the original amount (recommended). You can double-click on the Bill shown in the report above to quickly access the transaction. Note: If the Current Transaction section shows a deleted transaction, you cannot double-click to show the transaction. You will have to re-enter the transaction or enter an adjusting entry (option 2 below). Enter an adjusting entry that debits Accounts Payable and Credits Cost of Goods Sold. Since a Bill is involved, the debit to Accounts Payable will require a vendor name and will show as a Bill Credit on the Pay Bills window. Important: This report is the most useful when troubleshooting changes to the previous reporting period. However, if the client does not set a Closing Date, QuickBooks will not track the changes made to the previous reporting period on this report. If the client removes the closing date, QuickBooks will stop tracking changes to the previous reporting period until you or the client re-enters the Closing Date.
The Voided/Deleted Transactions Report (New)
If your client uses any edition of QuickBooks 2005, QuickBooks creates an activity log of all voids and deletions of existing transactions. This report is a great backup when the client does not set a Closing Date or temporarily removes the Closing Date.
This report is not dependent on the Closing Date because QuickBooks tracks the activity whether or not the transaction is dated in a previous reporting period. This "always on" report is also not dependent on any other
Company Preference settings (e.g. Audit Trail).
1. To access the Voided/Deleted Transactions Report, select the Reports drop-down menu, select Accountant & Taxes, and then select Voided/Deleted Transactions.
2. As you scan the report, look for transactions dated in the previous reporting period that were modified in the current report period.
3. To display more information about a transaction, double-click on the Original Transaction line. QuickBooks will then display the way the original transaction posted to the General Ledger in debits and credits.
4. Enter a Journal Entry to restore the General Ledger to its original condition (i.e., pre-void/pre-deletion). Keep in mind that numerous transactions may be voided and/or deleted. Reverse the Journal
5. Entry during the current reporting period (e.g., on 01/01/2005). Important Note: Changes You Cannot Track
There are three changes to QuickBooks that you cannot track using any of the methods in this article. #1 Changes to the Account fields in Item, Payroll Item, and Fixed Asset Item Setup Windows
If the user clicks Yes on the window shown above, QuickBooks changes the way each transaction that uses this Item posts to the General Ledger, including transactions in previous reporting periods. This type of change is protected by the Closing Date. However, QuickBooks does not track the changes on the Closing Date Exception report, the Audit Trail report or any other QuickBooks report.
When you make changes to the account field(s) in Payroll Item or Fixed Asset Item setup windows, QuickBooks always makes the changes to the General Ledger retroactive. Also, changes to the account field(s) in Payroll Items and Fixed Asset Items are not protected by the Closing Date.
Tip: If your client made changes to the account fields in Item, Payroll Item or Fixed Asset Item setup windows, you can either edit the Items to restore the original account(s) or you can enter an adjusting entry to reverse the impact of the account change on the General Ledger.
If the change to the account field is appropriate, you should enter a Journal Entry to adjust the prior period and then leave the new account in the Item, Payroll Item or Fixed Asset Item setup window. That way all transactions dated in the current period that use the Item, Payroll Item or Fixed Asset Item will post accurately. If the change the account field is incorrect, you should edit the Item, Payroll Item or Fixed Asset Item setup window to restore the original account(s) and make your changes retroactive (if prompted).
Note: When you edit the account field(s) in Payroll Items, QuickBooks does not change historical payroll information, just the impact of payroll transactions on the General Ledger. When you edit the account field in Fixed
Asset Items, QuickBooks does not change the depreciation schedules, just the General Ledger postings for transactions that include the Fixed Asset Item (e.g., a check used to purchase the Fixed Asset).
#2 Merging Accounts
When you merge two accounts together, QuickBooks combines all of the General Ledger activity for both accounts.
QuickBooks also changes each Item, Payroll Item or Fixed Asset Item that post to that account (if applicable) so that they include the Meals & Entertainment account. The transactions that include the Item, Payroll Item or Fixed Asset Item then post differently to the General Ledger as a result of the account merger. If a Closing Date is set, the closing date prevents users from merging accounts unless the user has the authority to bypass the Closing Date and then enter the Closing Date password (if the password is set). However, changes to previous reporting periods as the result of accounting mergers do not appear on the Closing Date Exception Report.
Tip: To locate account mergers performed by your client, compare the Trial Balance in your files with the current Trial Balance produced by QuickBooks. When you see missing account(s) on the current Trial Balance, refer to the Chart of Accounts to see if the account still exists. Make sure to include inactive accounts when viewing the Chart of Accounts. If the account is not on the Chart of Accounts, it is safe to assume that the client merged the account with another account. If the account still exists but now carries a zero balance, the client probably entered an adjusting entry to clear the account balance, or the client edited previously recorded transactions to clear the account balance. If the client entered or modified transactions to clear the account balance, QuickBooks will include that activity in the Closing Date Exception report – provided that the Closing Date was set at the time of the changes.
Note: If the client merged two accounts together, the merger is irreversible. You will have to re-create the missing account and then enter an adjusting entry to correct of the changes to the previous reporting period(s).
#3 Changing Account Types
You can edit most account types in QuickBooks. When you change the type of an account, QuickBooks places the account balance in a different section of the financial statements. This type of change is always retroactive. For example, if you change the type of an account from Other Current Asset to Expense, QuickBooks will move the Debit balance in the account from the Balance Sheet to the Income Statement. Needless to say, this type of change may have a material impact on financial statements, including financial statements in previous reporting periods.
Changes to account types are not protected by the Closing Date are not tracked on the Closing Date Exception report – or on any other QuickBooks report. However, you can easily locate this type of change by comparing the financial statements on file with the current financial statements generated in the QuickBooks file.